Italian Banks May Impose Senior Bondholder Losses, JPMorgan Says

(Bloomberg) -- Investors should sell the senior bonds of Banca Popolare di Vicenza SpA and Veneto Banca SpA because Italy may not win European Union backing to provide aid to the troubled lenders that shields those bondholders, according to JPMorgan Chase & Co.

Banks face tough tests to qualify for a so-called precautionary recapitalization that spares senior bondholders from losses, and Pop. Vicenza and Veneto Banca may not meet the requirements, said Axel Finsterbusch, a London-based strategist at JPMorgan. The lenders may not be eligible because they already have soured loans and may not be regarded as systemically important, he said.

“There's no guarantee these institutions will necessarily qualify,” Finsterbusch said in a phone interview. “There is a general idea that anyone can tap a precautionary recapitalization but it's the exception rather than the default option.”

Senior bonds of the Veneto, northern Italy-based lenders, which have received 3.4 billion euros from the financial industry-backed Atlante rescue fund, don't reflect the risk, he said. Some of the higher-ranking notes have risen to about 84 cents on the euro from a November low of about 70 cents, while junior bonds have fallen to a record 20 cents, according to data compiled by Bloomberg.

A Pop. Vicenza official declined to comment on whether the bank would qualify for a precautionary recapitalization. Officials at Veneto Banca said they weren't immediately able to comment.

European Rules

Italy is seeking permission from the European Commission to help the two banks, along with Banca Monte dei Paschi di Siena SpA, by injecting money from a 20 billion euro fund it set up to recapitalize troubled lenders. European rules require creditors to share the burden as a condition of rescue funds.

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Pop. Vicenza and Veneto Banca submitted a plan last month for as much as 3.3 billion euros of state aid and a mandatory conversion of about 1.2 billion euros of subordinated bonds, people with knowledge of the matter have said. They haven't proposed putting holders of their 13.5 billion euros of senior bonds in line for losses.

European officials may approve a plan that would spare senior bondholders at Monte Paschi, the world's oldest bank and one of Italy's biggest, but reject a similar solution for smaller banks like Veneto Banca and Pop. Vicenza because the economic fallout would be smaller, Finsterbusch said.

The precautionary recapitalization tool can't be used to clear up existing problems or for a prolonged time. Without it, senior bondholders may have to swap their notes for shares, he said.

--With assistance from Sonia Sirletti

To contact the reporter on this story: Tom Beardsworth in London at tbeardsworth@bloomberg.net.

To contact the editors responsible for this story: Shelley Smith at ssmith118@bloomberg.net, Abigail Moses